CWS Market Review – May 24, 2022

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Snap, Crackles and Pops

Last week, it was retail. This week, it’s social media. Today was an exceptionally brutal day for social media stocks. Shares of Snap (SNAP) fell over 43%. In a regulatory filing, the owner of Snapchat said, “the macroeconomic environment has deteriorated further and faster than anticipated.”

Hmm. I’m not sure if the problem stems from the macroeconomy or the simple fact that Snapchat isn’t as popular as TikTok.

The Snap news was enough to bring down a few other social media stocks. Shares of Facebook, or more formally, Meta Platforms (FB), fell by 7.6%. The stock still hasn’t recovered from the super-atomic wedgie it got two months ago. Google, formally called Alphabet Inc., (GOOGL) also got caught up in the selling. Shares of GOOGL dropped 5% today. Pinterest (PINS) lost 23%.

During today’s trading, shares of Twitter (TWTR) got as low as $35.40. Elon Musk’s offer price is now more than 50% higher than Twitter’s current share price. I think that’s a clear sign that the Musk deal ain’t gonna happen. You’ve heard of people “voting with their feet.” This is people voting with their sell orders.

I feel as if I’m committing some terrible social faux pas by mentioning something as archaic as actual business metrics, but someone needs to point out that Snap is not very profitable, nor has it been very profitable and it may never make a sustainable profit.

Don’t take my word for it. It literally says that in the company’s prospectus. To wit:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

(Don’t believe me? See this link, page 6.)

I hate to say it, but that line probably turned out to be the most accurate statement ever put out by Snap. To be fair, Snap has had some positive quarters, but nothing impressive. Now they’re saying that things look worse than before. This comes on top of a previous warning last month that inflation and supply-chain issues were weighing on the company’s profitability.

How Long Will the Lousy Market Last?

On Thursday, the S&P 500 closed at a 14-month low. Measured from the highest closing level from January 3, the index lost 18.7%.

The market went even lower during the day on Friday, but thanks to a late-day rally, the S&P 500 closed a tad higher on the day, but going by the intra-day numbers, the S&P 500 had lost 20.9% from its peak.

How much lower can we go?

The true answer is that I have no idea, nor do I much care. But I will lay out a few facts about bear markets.

The most important is that bear markets happen. They always have and always will. Statistically, bears come around about once every four years. That seems about the length of Wall Street’s memory.

The second fact is that bear markets tend to be very short. Even if the peak to trough lasts several months, the worst damage is often concentrated to a few weeks. Sometimes, a few days.

Importantly, bear markets are not felt evenly. Typically, the worst declines strike the sectors that had the biggest gains during the run-up. We’re certainly seeing that now. In fact, the Nasdaq peaked in November, a few weeks before the overall market peaked.

On the whole, our Buy List stocks have held up much better than the rest of the market, and that includes our big losers like Ross Stores (ROST) and Trex (TREX). In most any portfolio, you’re going to have some laggards – that’s why diversification helps.

Bear markets often have several false starts. Don’t get too excited about big one-day rallies. Usually, the bigger they are, the more likely they are to be fakes. I even mentioned that to you in late March after the market had a nice run-up: “I’ve been a doubter of this rally nearly since Day #1. It’s moved too fast, too soon, and it’s been too concentrated in higher-risk stocks.” That turned out to be the day of the market’s near-term peak.

In this case, I was mostly lucky, but be wary of bulls bearing gifts.

Perhaps the best lesson of bear markets is that this is when you see a lot of bargains. You simply have to be patient. I reserve the best ideas for our premium letter, but I will pass along the opportunity in Silgan Holdings (SLGN). This is a company that’s not very well known, which is how I like it.

Silgan is one of the world’s leading makers of metal cans and consumer packaging. The company employs over 15,000 people. Last month, Silgan said it made 78 cents per share for Q1. That was two cents better than estimates. CEO Adam Greenlee said, “Revenues grew significantly in each of our businesses as we successfully passed through raw-material and other cost inflation to the market.”

Business is going so well that Silgan raised its full-year guidance range to $3.90 to $4.05 per share. The previous range was $3.80 to $4.00 per share. In February, the company bumped up its quarterly dividend from 14 to 16 cents per share.

Don’t overlook these quiet stocks. They can be very profitable. The shares have trended lower over the last few weeks. Going by the company’s own guidance, shares of Silgan are going for a little over 10 times this year’s earnings estimate. Plus, the dividend yields about 1.5%.

Shout Out for Medical Devices Stocks

I also wanted to highlight one of my favorite investment sectors. That sector is medical device stocks. This is a great area to find strong investments. Some of my favorites in this field include Abbott Labs (ABT), Stryker (SYK), Edwards Lifesciences (EW), Medtronic (MDT) and Zimmer Biomet (ZBH).

This sector brings together several characteristics that make for promising investments. For one, the healthcare industry is massive. There are continuous innovations. The sector is heavily backed by the government. For established companies, the earnings growth tends to be very stable. That’s an underrated feature of many outstanding stocks.

Here’s a good example. The orange line shows the earnings growth line of Stryker. Note how steady the increases have been:

At this resolution, the numbers are a bit blurry, but you can see the consistency of Stryker’s earnings.

Another good feature about this sector is that it hasn’t done terribly well lately. I always pay attention when good stocks or sectors are lagging.

Here’s a look at the iShares U.S. Medical Devices ETF (IHI):

Again, notice how consistent the price gains have been. You can also see that any break from the long-term trend, as we’re having now, has been a good time to buy.

Some of the fund’s top holdings are Abbott Laboratories (ABT), Thermo Fisher Scientific (TMO), Danaher (DHR), Medtronic (MDT), Intuitive Surgical (ISRG), Edwards Lifesciences (EW), Stryker (SYK), Becton Dickinson (BDX), Boston Scientific (BSX) and IDEXX Labs (IDXX). You can probably tell I’m a fan of this sector because so many of these names have been or are currently on our Buy List.

The stock market will be closed on Monday for Memorial Day. Memorial Day is a fairly new holiday for the NYSE. The first time trading was closed for Memorial Day was in 1971.

The last Memorial Day when the market was open was May 25, 1970. That was in the middle of a nasty bear market, the worst since the great depression. The market bottomed the next day. The Dow has lost 35% in a year.

The losses were even greater than the indexes suggest because they were huge losses in over-the-counter securities. That led to the Nasdaq being founded the following year. If you were ever curious, the Nasdaq Composite started life at 100.00 on February 5, 1971. It’s outlasted several bear markets and so will we.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on May 24th, 2022 at 7:51 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.